Income - Expenses =Cash Flow ?
Couple of questions:
1. Does anyone have a good program that calculates cash flow?
2. How do I calculate vacancy rate and include it into the cash flow est.?
3. What is a good maintenance fee percentage?
4. What is a good cash flow rate?
Thanks for the help.
1. Russ Whitney has a good calculator on his website under student tools. Use this to get your insurance, mortgage, etc and then calculate repairs, vacancies, etc.
2. Depends on your area, I use 5% which I think is fine for my area and my experience so far.
3. Typically if you hire a mgmt company you will pay 6-10% of the monthly income to them
4. A cashflow rate as in passive income per month or a rate of return. For PER UNIT, I try to hit $150 a month per unit cashflow, as far as return on cash invested, 30% is good, anything higher is very good (in my opinion)
HTH
[addsig]
Thanks-
Its the actual math formulas that i am seeking.
2. How much do i set aside for vacancy? Is this formula a correct example? Rent= $500 Vancancy=5%, thus i set aside: $25=$500X0.05 ???
3. So even if i am doing the maintenance myself how much do i set aside? Is this formula a correct example? Rent= $500 maintenance=10%, thus i set aside: $50=$500X0.10 ???
4. So to determine your cashflow rate is this the formula? Expenses per month = $333, and my rent is $500, then my cash flow rate (Debt Coverage Ratio) is 1.5% ???
New Question?
5. You mentioned a 30% return. What is the formula to determine that?
Thanks for the help.
[ Edited by Soon_2B_Rich on Date 11/24/2004 ][ Edited by Soon_2B_Rich on Date 11/24/2004 ]
1. I have the forumulas in a spreadsheet at home but most of them came from Robert Allen's "Nothing down in the 90's"
2. Vacancy depends on your area but you have the formula correct, 5% has been ample for my area but I don't know yours, I've heard some people say up to 20%.
3. So when you say maintenance you more mean repairs than mgmt, I have used 5% but to be honest, it really depends on the property. I would not do below 5% but for older houses do more than 5%.
4. I don't look at debt coverage ratio, only dollar amounts, I try for $150 per unit, which I usually get between $125 and $200.
5. What did it cost to get into the property? This includes appraisal, money down, etc. Simple example, I bought a place for $74k (2 units) that brings in $1100 a month. My cashflow is roughly $400 per month. it cost me roughly $9600 to get into the property with down and everything else (it was non-seasoned, that's why so high) with $400 a month cashflow, in one year that is $4800 back, which is roughly a 50% return on cash invested in the first year.
HTH
Quote:
On 2004-11-24 13:15, Soon_2B_Rich wrote:
Thanks-
Its the actual math formulas that i am seeking.
2. How much do i set aside for vacancy? Is this formula a correct example? Rent= $500 Vancancy=5%, thus i set aside: $25=$500X0.05 ???
3. So even if i am doing the maintenance myself how much do i set aside? Is this formula a correct example? Rent= $500 maintenance=10%, thus i set aside: $50=$500X0.10 ???
4. So to determine your cashflow rate is this the formula? Expenses per month = $333, and my rent is $500, then my cash flow rate (Debt Coverage Ratio) is 1.5% ???
New Question?
5. You mentioned a 30% return. What is the formula to determine that?
Thanks for the help.
<font size=-1>[ Edited by Soon_2B_Rich on Date 11/24/2004 ]</font>
<font size=-1>[ Edited by Soon_2B_Rich on Date 11/24/2004 ]</font>
A basic formula is:
Number of units x Avg rent per unit x 12 = Estimated Annual Gross Rental Income
Estimated Annual Gross Rental Income + Other income - Vacancy Rate(% of annual) = Effective Annual GRI
Effective Annual GRI - Operating Expenses = Net Operating Income.
Net Operating Income - Debt Service = Pre-tax Cash Flow
Pre-Tax Cash flow / number of units = Pre-tax cash flow per unit.
You can create this very simple spreadsheet in Excel or Lotus. It is the most basic of analyzing tools.
Vacancy rates vary by your market. We were using 5% up until about July when we changed over to a 10% rate.
To me there is NO good fee % for maintenance. It depends on your building and its condition. Our rule of thumb is that operation expenses should be in the 25% to 40% range of the Rental Income, if it is at either end or outside that range we take a hard look at those numbers.
A good cash flow rate is whatever works best for you. You may take less cashflow in a high appreciating market or if there is a large chunk of equity. It is totally dependant on what your goals and objectives are.
This is a very good article:
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&articleid=467
Hrm...
"Its the actual math formulas that i am seeking.
2. How much do i set aside for vacancy? Is this formula a correct example? Rent= $500 Vancancy=5%, thus i set aside: $25=$500X0.05 ??? "
The best vacancy rate to use is probably your area's vacancy rate +5%. So if the standard vacancy rate is 3% in your are, add 5%.
In the case of a single home residence, I wouldn't factor in a vacancy rate of less than 8% (100%/12months) regardless of your area's vacancy rate. The reason is that you won't always be able to re-rent the property immediately due to renovations, time to advertise, etc, etc.
"3. So even if i am doing the maintenance myself how much do i set aside? Is this formula a correct example? Rent= $500 maintenance=10%, thus i set aside: $50=$500X0.10 ??? "
For calculation of maintenance, always work from the total per month rent. So if you were using 10%, that would be correct. However, it's generally good to factor in a 5 to 10% contingency, and also consider scaling up the cost if the property is older than 10 years.
"4. So to determine your cashflow rate is this the formula? Expenses per month = $333, and my rent is $500, then my cash flow rate (Debt Coverage Ratio) is 1.5% ??? "
In order to calculate Debt Coverage Ratio, take your total rent (500), subtract ongoing expenses before debt service (333). You now have a value of $167. Then, divide that by your monthly mortgage payment. So, if your monthly mortgage payment is $167 and your net is $167, then your ratio would be 1.0. If your mortgage payment was let's say 135, then your debt coverage ratio would be $167/135 = 1.237.
As a rule of thumb, I try to shoot for a DCR of at least 1.15 after factoring in repair contingency and vacancy. Essentially, you want as much wiggle room as possible when acquiring, because you never know what's going to happen.
"5. You mentioned a 30% return. What is the formula to determine that?"
Well, if you want a pure ROI based on money put in and money taken out, calculate your initial cash investment (downpayment). Then, calculate your total cashflow over the life of the property. Add in your equity earned in the property (the total of the debt of the property repaid over the life of the mortgage) with annualized appreciation factored in (I typically use 3 to 5% compounded depending upon the property and area). Once you have a total equity gain + cashflow returned over the amortization period, you can divide your original cash investment into that figure for a base multiplier.
For example... let's assume the following.
Total purchase price = 100k
Downpayment = 10 k
Appreciation rate = 5%
Mortage term = 20 years
Cash flow = $140/month = $1,680/year
Present equity difference = 90 k
Future equity multiplier = (1+appreciation rate)^(mortgage period) = (1+.05)^20
= 2.65
Future equity value = present equity difference x future equity multiplier = 90,000 x 2.65
= $238,500
Future total cashflow = yearly x mortgage period = $1,680 x 20 = $33,600
Total gain over 20 year period = Future equity value + future cash flow = $238,500 + 33,600 = $272,100
Total return multiplier = Total investment gain/cash investment = $272,100/10,000 = 27.21
Therefore, you have multiplied your investment by 27.21 times over a 20 year time span.
To calculate your compounded Return on original investment (assuming you were to sell at the end of the 20 year mortgage terms), you would simply work backwards.
IE, if your compounded return multiplier over a 20 year span is...
(1+interest)^mortage period
Then your interest rate will be...
multiplier^(1/mortgage period)
= 27.21 ^ (1/20)
= 27.21 ^ 0.05
= 17.96%
Now, you're looking at this and saying "wait a sec, that's not 30%!". And you'd be correct. However, this calculation is only a basic calculation that does NOT include a number of factors.
a) This will change if your cashflow number is larger or smaller (thus the more is better idea 8P)
b) This does NOT factor in any RETURNS you may get on the Cashflow that you recieve over time. For example, if you are able to earn 8% compounded from all cash you recieve, that changes your total ROI substantially. If you can buy ANOTHER property, your total ROI changes even more (Leverage on your leverage so to speak)
c) Inflation over time on rents increases your cashflow from year to year.
d) Inflation over time does NOT affect your mortgage payment.
So, if you operate on the theory of the declining value of money over time, then your numbers change somewhat. IE, your cashflow increases relative to your mortgage (in absolute terms), AND the value of your mortgage payment in Today's dollars decreases over time as it remains static against inflation.
Additionally, we haven't actually tried to calculate the impact of inflation on our returns. The results change significantly if we assume a 5% return ABOVE inflation, versus 5% WITHOUT inflation factored in.
As for factoring all that other stuff, that's something you'll need to work on but 30% sustained return is quite achievable if you work at it. 8)
Other stuffs...
When calculating expenses, make sure you don't miss the details like insurance costs, property taxes, any local levies, easement costs (in the case of some larger buildings), foreseeable short/medium/long term repair costs (like repavement, roof replacement), etc, etc, etc.
Lastly, don't count on your mortgage rate to be low forever. We all know interest rates are going up, so if you're planning on holding the property for the long haul, don't use a prime of 2% as your base, use a more realistic number like a prime of 5%. This way, you won't have any surprises if you have to refi in 5 years. Otherwise you may find that your great cashflow is suddenly completely consumed at the point of refinancing.
Hope that helps.
Galahad
WOw, you guys are great. Thank you so much. I think i have enought homework for the long weekend. :-D
Quote:Does anyone have a good program that calculates cash flow? Soon_2B_Rich,
Here is a rental cash flow analysis spreadsheet you might find useful. Just make all the appropriate substitutions in this u r l.
www (dot) r e i c l u b (dot) com/forms/cashflowanalysis.xls
[ Edited by NewKidinTown2 on Date 11/25/2004 ]
Well, since you asked...
"Because you never know what is going to break, I find that a DCR of 1.25 or better leaves ample cash flow for the unplanned repairs. I don't have a repair contingency, but I use a higher DCR in my cash flow analysis. "
While you can use a higher DCR as your multiplier, the problem with purely using DCR as your multiplier is it doesn't scale accurately when your downpayment changes. For example, if you are dealing with larger commercial properties, factors like location can have a serious impact on financing available. You may be required to put a larger amount down, thus skewing your calculations.
For example, if you have debt of 50%, then a DCR of 1.25 will allow a much smaller percentage for overall repair costs versus the asset's value than if you have debt of 20%. While major leverage is ideal, you can't always expect to buy something with 10% down that carries itself safely with any certainty. Similarly, in an unfavorable interest rate market, you may choose to increase your downpayment in the short term (several years) in order to both increase your safety margin and reduce total interest payments. You would then refinance that money out when market rates improve. And in the long haul, you're better to increase your assets at a slightly lower return rate short term than sit on cash indefinitely.
"Future equity value = present equity difference x future equity multiplier = 90,000 x 2.65
= $238,500
Here is where I am struggling to understand what you are trying to compute. If I purchase a $100K property with $10K down, then my initial equity in the property is only $10K. The $90K debt on the property is converted to equity through appreciation and through reduction in the loan balance. Appreciation is also increasing my initial $10K equity position.
If the property has a FMV today of $100K, and if the appreciation rate stays at a contant 5% over 20 years, then using your appreciation multiplier of 27.21 suggests the property is now worth $272100 after 20 years. Assuming a 30-year fixed rate amortizing loan and only minimum monthly mortgage payments, I would still have about 50% of my original loan balance remaining, or $45K. Subtract the loan balance from the new FMV and your equity in the property is only $227,100"
Okay, if you reread my formulas, the assumption is that you are operating on a 20 year term mortgage, IE, you are paying the mortgage in FULL at the end of the term. While carrying a 30 year mortgage allows a lower payment structure, because you are paying interest over a longer term (read, more paid in interest total), it lowers your total ROI. Redoing this formula with a 30 year paid in full mortgage term changes the numbers yet again. Also, calculating equity return on a partially paid mortgage (your fastest ROI gains are towards the end of the mortgage as your principal paydown accelerates) reduces your total ROI.
"Total gain over 20 years = Future equity value + future cash flow - initial investment = $227100 + 33,600 - $10,000= $250,700, for a Total return multiplier = 25.07. With these numbers I get a 17.48% annual compounded return.
My question is: W hy are you allowed to ignore the initial downpayment and the current mortgage balance in your equity calculations and total gain? Doesn't this inflate your numbers?"
The $10,000 is your initial downpayment (initial investment). It is in the formula as it represents your original money out of pocket. As for the current mortgage balance, it's irrelevant since if the property carries itself, you're not paying the mortgage out of your own personal cash. IE, you're not investing additional monies. The property's tenants are paying the mortgage for you.
Hope that helps.
Galahad
Ah, okay. I see what you're saying.
Calculating your ROI once you've already decided to sell is basically investment hindsight. 20/20, but doesn't really do anything for you.
My apologies. I just noticed that the formula I posted for ROI was based on what I personally use.
You are correct that if you wanted to do an absolute ROI calculation, you would include the down payment's appreciation over time. This would push your ROI numbers in this case up by 5 percent compounded (and add 10k x 27.21 to the total FV of the property).
For my personal calculations, I tend to leave out the down payment in calculation of ROI. The reason is I utilize an Opportunity Cost ROI, or cost of investment so to speak.
I assume I'll get a minimum of 5% on that 10k regardless of whether I invest it or not (higher or lower depending on interest rates, inflation, etc). So for me, since I utilize the ROI numbers in up/downside risk analysis, I'm more concerned with ROI above standard returns, or the opportunity cost adjusted ROI.
Sorry about the confusion. I usually do all this stuff on the fly myself, so sometimes I forget that I'm posting to people who don't analyze the same way that I do. 8P
As for your the formula example I gave, remember that this is a pro-forma projection for ROI. If you were to plan an exit from a property at the 20 year point of a 30 year term, or the 10th year of a 30 year term, you would need to factor out the mortgage value in order to have a correct calculation. Why you would intentionally re-sell when you're already profitable and your returns are about to accelerate... I don't know.
Personally, my outlook is a little like Warren Buffet. If the property is sound and produces good returns, the best time to sell is never. If you need to upgrade investments, you always have the option to refi and purchase an additional property. So unless the ROI of a new property was spectacularly above a property you already own (and stunningly more expensive thus precluding the use of refinanced cash plus cash flow as a down payment), the uncertainty involved with assuming a new property combined with the inherent risk of pro-forma projections would generally make the sale or 1031 exchange of an already highly profitable property of nominal value. That of course is only my opinion. 8)
Just my 2 cents.
Galahad
Quote:If you were to plan an exit from a property at the 20 year point of a 30 year term, or the 10th year of a 30 year term, you would need to factor out the mortgage value in order to have a correct calculation. Why you would intentionally re-sell when you're already profitable and your returns are about to accelerate.I don't plan an exit 20 years in advance. I just recognize that there are lots of reasons which may compel a sale, rather than holding a property forever. Here are just a few: Neighborhood in decline
Local economy stagnant, with appreciation capped
Market rents peaked and in decline
Municipal development or commercial development nearby which decreases property value, makes property hard to rent, results in high turnover rate
Property has become maintenance intensive, resulting in marginal or breakeven performance
Personal financial requirements for cash
Want to retire from landlording
Reduction in risk exposure
Estate Planning
1031 Exchange to a better investment property
Great thread....I downloaded "NewKids" cash flow analysis spreadsheet and I friggin love it! I've been playing with it for a couple of weeks. It's very well done. Good luck!
Great thread....I downloaded "NewKids" cash flow analysis spreadsheet and I friggin love it! I've been playing with it for a couple of weeks. It's very well done. Good luck!
Actually, that is Dave T's spreadsheet. Though he seems to have retired from these forums, Dave T has contibuted extensively in the past to the Tax Strategies and Landlord Forums.
NewKid,
A nice tribute to the process of learning, sharing, and 'pay-it-forward'.
I, too, just downloaded the spreadsheet and will test myself a bit this week with it.
~~Thank You~~